House prices near record

Nick Toscano, Adam Carey and Craig Butt

David Farrell fears his hopes of buying a Melbourne property have become a distant dream. Photo: Pat Scala

Melbourne's house prices are on the cusp of a new high after rising 8.5 per cent last year, while median unit values rose 8.7 per cent in 2013 to a record $481,000.

The increase has sparked warnings that more Melburnians, particularly younger people, are being locked out of home ownership.

A study of housing affordability last year found Melbourne was one of the world's least affordable cities, with its median-priced property costing 7½ times the median annual household income.

Illustration: Matt Golding.

An independent Fairfax Media analysis found that 50 years ago, Melbourne house prices were about three times annual income. That means houses are 2½ times more costly than they were in 1964, relative to income.

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The Demographia International survey, which ranked cities in seven countries based on house prices against income, found Melbourne was less affordable than New York but more affordable than London.

The median house price in Melbourne hit $625,000 in December, still 0.9 per cent below the peak of October 2010. The median value of a unit or apartment was $481,000, RP Data-Rismark's December home value index shows.

But property analysts said the jump in property prices was not a new boom or bubble in the housing market, merely a recovery from the slump of 2011-12. They said recent announcements of mass job losses to come in Victoria's car manufacturing industry, and an ample supply of housing stock, would probably result in only modest growth in 2014.

Robert Larocca, Victorian housing market specialist at RP Data, said Melbourne's property values had been moving up and down. ''There are still some soft parts of the market and that's not surprising given that the growth over the past year has been supported by record low interest rates, and very supportive monetary policy,'' Mr Larocca said.

''So I don't think you could mistake what's happened in Melbourne over the past year as a boom. It's not been, it's been a recovery and we've still got some way to go.''

He said there remained a ''vast swath of suburbs'' in middle and outer Melbourne where a dwelling - house or unit - could be bought for below the median of $563,000.

Angie Zigomanis, senior manager at commercial property analysts BIS Shrapnel, said most growth in Melbourne had been in inner and northern suburbs, while the outer suburbs had been flatter.

''People in Melbourne's outer suburbs are more working in manufacturing or retail, areas that are more under pressure in the economy, leading to a lack of confidence,'' Mr Zigomanis said. ''Whereas people in the middle suburbs have been able to take advantage of those lower interest rates to wade into the market.''

Engineer David Farrell, 28, said rising property prices had made his hopes of buying a home with his girlfriend in Melbourne feel like a distant dream.

Living in an Essendon flat, he has saved almost $20,000 for a deposit, and when his girlfriend finishes university this year, the pair will have a healthy dual income.

''We're pretty stable in terms of our outlook, but land values are too high and things don't seem to be getting any better,'' he said.

''It's a scary time to buy.''

The couple want a house with a backyard to raise children in the future and think their best bet is moving to a rural area.

Treasurer Michael O'Brien said steadily rising prices were a sign consumers were confident in the state economy, and would encourage new housing construction needed to accommodate population growth. The state government had policies to drive housing affordability, including stamp duty concessions for first home buyers and a first home owners grant for newly built homes, he said.

''This year alone we have seen more first home buyers in Victoria than in NSW and Queensland combined.''

Adam Farrar, chairman of housing lobby group National Shelter, said more people were being locked out of capital city housing markets, especially younger people. It was ''absolutely time'' governments took housing affordability seriously, he said.